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ChoiceOne Financial Reports Fourth Quarter and Year End 2022 Results

ChoiceOne Financial Services, Inc., the parent company for ChoiceOne Bank, reported financial results for the quarter ended December 31, 2022.

Financial Highlights

  • ChoiceOne reported net income of $6,684,000 and $23,640,000 for the three and twelve months ended December 31, 2022, compared to $5,012,000 and $22,042,000 for the same periods in 2021.
  • Diluted earnings per share were $0.89 and $3.15 in the three and twelve months ended December 31, 2022, compared to $0.66 and $2.86 per share in the same periods in the prior year.
  • Core loans, which exclude Paycheck Protection Program (“PPP”) loans, held for sale loans, and loans to other financial institutions, grew organically by $57.4 million or 20.3% on an annualized basis during the fourth quarter of 2022 and $206.1 million or 21.0% during the full year 2022.
  • Deposits increased by $65.7 million or 3.2% for the full year 2022 with related deposit interest expense increasing $2.5 million. Deposits declined $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition.
  • ChoiceOne opened a loan production office in Oakland County, Michigan during the fourth quarter 2022. It is intended that this location will host both commercial and mortgage lenders and is ChoiceOne's fifth loan production office opened in recent years.
  • ChoiceOne plans to launch an enhanced treasury services online platform for business clients in 2023. This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities.

"Our investment in growing an experienced commercial lending team continues to drive strong organic core loan growth, with core loans growing organically over 20% during 2022,” said Kelly Potes, Chief Executive Officer. "Our focus on customer relationships is reflected in our deposit balances which increased $65.7 million compared to the end of 2021 despite increased pressure from competition. With higher interest rates, our local low-cost core deposit franchise provides significant value, and we expect to continue to fund our growth with local deposits and other on-balance sheet liquidity.”

ChoiceOne reported net income of $6,684,000 and $23,640,000 for the three and twelve months ended December 31, 2022, compared to $5,012,000 and $22,042,000 for the same periods in 2021. Diluted earnings per share were $0.89 and $3.15 in the three and twelve months ended December 31, 2022, compared to $0.66 and $2.86 per share in the same periods in the prior year.

Total assets as of December 31, 2022, increased $19.2 million as compared to December 31, 2021. ChoiceOne saw deposits decline $38.7 million in the fourth quarter of 2022 due to some seasonality in municipal deposits and increased competition. The cost of these deposits also increased by $940,000 in the fourth quarter of 2022 compared to the third quarter of 2022 and $1.8 million compared to the fourth quarter of 2021. Deposits have increased by $65.7 million in the twelve months ended December 31, 2022; however, during that time deposit expense has increased $2.5 million. Cost of interest-bearing deposits increased to 0.66% in the fourth quarter of 2022 primarily due to the increases in rates offered to retain clients and an increased interest in certificates of deposit. ChoiceOne is actively managing these costs while still retaining funds and anticipates that deposit expense will continue to lag the expected additional increases in the federal funds rate. Borrowing interest expense for the twelve months ended December 31, 2022, increased $1.2 million as compared to the same period in 2021 primarily due to the issuance of $32.5 million in subordinated debt that was completed in the third quarter of 2021 and the increase in rates on borrowings.

Core loans grew organically by $57.4 million or 20.3% on an annualized basis during the fourth quarter of 2022 and $206.1 million or 21.0% during the full year 2022. Loans to other financial institutions, consisting of a warehouse line of credit, were suspended at the end of the third quarter 2022 to preserve liquidity for loan growth. ChoiceOne continues to have ample on balance sheet liquidity to fund future loan growth, including an estimated $168 million of cash flow from securities over the next two years. Interest income increased $10.4 million in the twelve months ended December 31, 2022, compared to the same period in the prior year. The increase was driven by a $6.3 million increase in securities interest income despite the average balance of securities decreasing $7.0 million during the year. In 2022, ChoiceOne liquidated a total of $46.8 million in securities resulting in an $809,000 realized loss, in order to redeploy funds into higher yielding loans and securities, and to reduce the risk of extension on certain fixed income securities which include a call option. $4.2 million of the increase in interest income is from loan interest income and was primarily a result of higher loan balances and $2.0 million of accretion income from acquired loans partially offset by a decrease in PPP fee income of $3.9 million.

ChoiceOne had $250,000 of provision for loan losses expense for the year ended December 31, 2022. Management has seen declining deferrals and very few past due loans; however, the additional provision was deemed necessary due to consistent loan growth. On December 31, 2022, the allowance for loan losses represented 0.64% of total loans. ChoiceOne will adopt ASU 2016-13 current expected credit loss ("CECL") on January 1, 2023. Due to the current economic environment, the nature of the new calculation, and purchase accounting with our recent mergers, we anticipate an increase in our current reserve of between $6.5 million and $7.0 million which results in a reserve to total loan coverage ratio between 1.15% and 1.20% on January 1, 2023. Approximately 20% to 25% of this increase is related to the migration of purchased loans into the portfolio assessed by the CECL calculation. Purchased loans carry approximately $4 million of accretable yield which will be recognized into income over the remaining life of the loans. ChoiceOne will also book a liability for expected credit losses on unfunded loans and other commitments of between $2.5 million to $3.0 million related to the adoption of CECL guidance. These unfunded loans are open credit lines with current customers and loans approved by ChoiceOne but not funded. The increase in the reserve and the cost of the liability will be funded through equity, net of tax, in accordance with FASB guidance.

Shareholders’ equity totaled $168.9 million as of December 31, 2022, down from $221.7 million as of December 31, 2021, primarily due to an increase in the after-tax net unrealized loss on securities available for sale resulting from higher market interest rates. ChoiceOne's derivative strategy implemented during the second quarter of 2022 and repositioned during the fourth quarter of 2022, is expected to better prepare the bank should rates continue to rise. The net impact on equity of the derivative strategy as of December 31, 2022, was $957,000 net of tax. ChoiceOne Bank remains “well-capitalized” with a total risk-based capital ratio of 13.0% as of December 31, 2022, compared to 12.9% on December 31, 2021. No shares of common stock were repurchased during the fourth quarter of 2022; however, ChoiceOne may strategically repurchase shares of common stock in the future depending on market and other conditions.

Total noninterest income declined $5.1 million during the year ended 2022 compared to the year ended 2021. $4.1 million of this decline is due to the change in the mortgage sales environment from the prior year. With the rapid rise in interest rates, refinancing activity has slowed, and demand has shifted towards adjustable-rate products. Customer service charges increased $722,000 during 2022 compared to 2021 as prior year service charges were depressed by the effects of the COVID-19 pandemic. The change in market value of equity securities declined $1.4 million during 2022 compared to 2021 consistent with general market conditions. Equity investments include local community bank stocks and Community Reinvestment Act bond mutual funds.

Total noninterest expense increased $557,000, or 1.1%, in 2022 compared to 2021. Overall expense management was a focus in 2022 and will continue to be in 2023 given inflationary pressures. The increase in total noninterest expense was related to an increase in salaries and wages due to annual wage increases and the addition of new commercial loan production and wealth management staff. This increase was offset by decreases in other categories including professional fees. ChoiceOne continues to monitor expenses and looks to improve our efficiency through automation and use of digital tools. ChoiceOne plans to launch an enhanced treasury services online platform for business clients in 2023. This new platform targets mid-sized businesses and municipalities who require enhanced reporting, security, and payment capabilities. Management believes that continuing to invest in our technology and people is the right way to maintain sustainable growth.

Potes further commented, “Our growth and well managed expenses in 2022 are a result of the hard work of our employees and the client relationships that they foster. ChoiceOne’s mission is to provide superior service, quality advice, and treat all we meet with utmost respect. Our value is not measured in the interest rate we pay, but the interest we take in our client’s success. I am very pleased with our 2022 results and believe we have the right pieces in place to have a successful 2023.”

About ChoiceOne

ChoiceOne Financial Services, Inc. is a financial holding company headquartered in Sparta, Michigan, and the parent corporation of ChoiceOne Bank. Member FDIC. ChoiceOne Bank operates 35 offices in parts of Kent, Lapeer, Macomb, Muskegon, Newaygo, Ottawa, and St. Clair counties. ChoiceOne Bank offers insurance and investment products through its subsidiary, ChoiceOne Insurance Agencies, Inc. For more information, please visit Investor Relations at ChoiceOne’s website at choiceone.bank.

Forward-Looking Statements

This release may contain forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "plans," "predicts," "projects," "may," "could," "look forward," "continue", "future", "will" and variations of such words and similar expressions are intended to identify such forward looking statements. These statements reflect current beliefs as to the expected outcomes of future events and are not guarantees of future performance. These statements involve certain risks, uncertainties, and assumptions ("risk factors") that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what may be expressed, implied, or forecasted in such forward-looking statements. Furthermore, ChoiceOne undertakes no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events, or otherwise. Risk factors include, but are not limited to, the risk factors described in Item 1A in ChoiceOne Financial Services, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2021.

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